Wednesday, October 31, 2012

Politics in Europe is beginning to resemble Halloween. Trick-or-treaters like Greece and Spain come to the doorstep of Germany and the European Union for bailout money. But these visitors are not polite neighborhood kids asking for a Snickers bar. These are the characters that bring on eye rolls every Halloween as they walk up the front steps.

You know the kid who claws deep into the candy bowl even after you've asked him to only take two pieces of candy... and then comes back a second time for more? That's Greece.

After receiving bailout funding from the International Monetary Fund (IMF) and European Union (EU) in May 2010, Greece quickly fell behind in implementing the reforms conditional upon taking the rescue money. But that wasn't enough. Greece came back for a second helping when it received another bailout package in March 2012. And again, Athens has failed to meet targets for shrinking its public sector, privatizing state-owned companies, and boosting competitiveness. Now after reneging on two agreements, Greece is asking for even more time to implement its reforms - doubtless to be followed by yet another thrust into the candy bowl.

That the investigative journalist and editor Costas Vaxevanis is being put in the dock today for publishing a list of 2,000 Greeks with alleged Swiss bank accounts testifies to the moral bankruptcy of the Greek political class.

The list in question was given to the Greek government two years ago by the then French finance minister, Christine Lagarde. There is no suggestion that all those on the list necessarily have evaded Greek taxes through their Swiss accounts; moreover, the list only covers accounts at a single Geneva-based bank branch. But if, as Mr Vaxevanis and others suggest, the list was shelved and no investigation carried out into the account holders’ fiscal probity, it is a scandal compounded by the misjudged decision to shoot the messenger.

Mr Vaxevanis is charged with violating data protection laws. Whether or not he technically did so, there can be no doubt that he and Hot Doc, his magazine, have acted in the utmost public interest – more than can be said about the state now persecuting him. The judge must set Mr Vaxevanis free.

It was clear from the very start of Athens’ debt crisis that its tax system – if it can be called that – needed complete reform. Greece’s political economy has been based on making outsiders pay for privileges enjoyed by the clients of the main political parties and borrowing abroad to top up. A tax system in which insiders hardly pay and compliant outsiders receive shoddy public services is just the most visible case of political rot.

Is it time for fiscal consolidation or stimulus? Should governments cut or increase spending? Once again the issue is a matter of dispute among policymakers and economists. Citizens, having been told in 2008-2009 that the imperative was to stimulate the economy, and in 2010-2011 that the time had come for retrenchment, are understandably confused. Should priorities once again be reversed?

At the International Monetary Fund’s annual meeting in October, the Fund’s chief economist, Olivier Blanchard fueled the controversy by pointing out that in recent times governments have tended to underestimate the adverse growth consequences of fiscal consolidation. They have typically assumed that to cut public spending by a dollar would reduce GDP by 50 cents in the short term; according to Blanchard, the true outcome in current conditions is a decline by between $0.90-1.70. That is a big gap, but also a perplexing finding: how can there be so much uncertainty?

Contrary to what such forecasting disparities may suggest, economists actually know a lot about the consequences of fiscal policy, at least much more than they used to know. Until the 1980’s, it was routinely assumed that the so-called “multiplier” – the ratio of change in GDP to the change in government spending – was stable and larger than one. A one-dollar spending cut was believed to reduce GDP by more than one dollar, so that fiscal retrenchment was economically costly (while, conversely, stimulus was effective).

Multitasking is not exactly the strong point of Europe’s current generation of leaders. They have rightly given the eurozone crisis – the central question bearing on the European Union’s future – top priority. But all other important issues – above all, a common foreign and security policy – have been almost completely ignored. And it is here – Europe’s external relations, an issue absolutely vital to the future of all EU citizens – that renationalization is rearing its ugly head again.

Today, we can recognize the outlines of a post-American international (dis)order – not only its emerging structures, but also its risks, threats, and conflicts, all of which are intensifying. For Europe – and for the rest of the world – the financial crisis has proven to be an accelerant of far-reaching changes.

In East Asia, the world’s most dynamic and dominant region in terms of future global economic development, confrontation is escalating between the key powers – China, Japan, South Korea, and Taiwan – over border issues, territorial claims, prestige, and unfinished historical business. Add to this the perennial crisis on the Korean peninsula and the Taiwan conflict, which could flare up again anytime.

Tuesday, October 30, 2012

The prospects for the euro and the eurozone remain uncertain. But recent events at the European Central Bank, in Germany, and in global financial markets, make it worthwhile to consider a favorable scenario for the common currency’s future.

The ECB has promised to buy Italian and Spanish sovereign bonds to keep their interest rates down, provided these countries ask for lines of credit from the European Stability Mechanism and adhere to agreed fiscal reforms. Germany’s Constitutional Court has approved the country’s participation in the ESM, and Chancellor Angela Merkel has given her blessing to the ECB’s bond-buying plan, despite strong public objections from the Bundesbank. And the international bond market has expressed its approval by cutting interest rates on Italy’s ten-year bonds to 4.8%, and on Spain’s to 5.5%.

Italian bond rates had already been falling before ECB President Mario Draghi announced the conditional bond-buying plans. That reflected the substantial progress Italian Prime Minister Mario Monti’s government had already made. New legislation will slow the growth of pension benefits substantially, and the Monti government’s increase in taxes on owner-occupied real estate will raise significant revenue without the adverse incentive effects that would occur if rates for personal-income, payroll, or value-added taxes were raised.

Originally, the European Union was what psychologists call a “fantastic object,” a desirable goal that inspires people’s imaginations. I saw it as the embodiment of an open society – an association of nation-states that gave up part of their sovereignty for the common good and formed a union dominated by no one nation or nationality.

The euro crisis, however, has turned the EU into something radically different. Member countries are now divided into two classes – creditors and debtors – with the creditors in charge. As the largest and most creditworthy country, Germany occupies a dominant position. Debtor countries pay substantial risk premiums to finance their debt, which is reflected in their high economy-wide borrowing costs. This has pushed them into a deflationary tailspin and put them at a substantial – and potentially permanent – competitive disadvantage vis-à-vis creditor countries.

This outcome does not reflect a deliberate plan, but rather a series of policy mistakes. Germany did not seek to occupy a dominant position in Europe, and it is reluctant to accept the obligations and liabilities that such a position entails. Call this the tragedy of the European Union.

Prosecutors on Monday set a fast-track trial date for the investigative journalist arrested last weekend after publishing a politically sensitive list of Greeks said to have Swiss bank accounts.

The snowballing case has raised questions about press freedom and Greece’s willingness to crack down on tax evasion.

Prosecutors said that Kostas Vaxevanis, the editor of Hot Doc magazine, would be tried Thursday in Athens on charges of interfering with sensitive personal data in a one-hearing procedure that is routine in Greece for misdemeanors. If found guilty, he could face a minimum prison term of one year and a fine of around €30,000, or about $39,000, one of his lawyers said.

Since his arrest on Sunday and release that same day, Mr. Vaxevanis has become a popular symbol as a crusader against a corrupt system, one in which the political class is seen as protecting the interests of the business elite at the expense of ordinary Greeks who are suffering from years of austerity.

The case has also prompted a debate about whether a journalist has the right to defend freedom of the press at the expense of personal privacy.

Monday, October 29, 2012

Greece’s slow and cumbersome justice system moved with stunning swiftness over the weekend to arrest and charge a respected investigative journalist who published a list of prominent people with Swiss bank accounts. Contrast that with the two years that Greek tax authorities sat on that same list after the French government, which had seized it in a criminal investigation, turned it over to Greece to determine whether some of those Swiss accounts were possibly linked to tax evasion.

Swiss bank accounts are legal, but they can easily be used to avoid paying taxes. Yet a succession of Greek governments, which had pledged to increase tax revenues, failed to investigate the matter. Thanks largely to the decision by the editor Kostas Vaxevanis to publish the list in Hot Doc magazine, several former finance ministers are struggling to explain why.

This list and other lists of offshore accounts in Greek government hands must be fully examined for illegal tax violations. But, so far, the only person charged with wrongdoing is Mr. Vaxevanis. He is accused of violating the privacy of the account holders and faces a possible one-year minimum jail sentence when his case comes to trial on Thursday. Whatever the intricacies of Greek privacy law, this case looks to us, and many other journalists, like selective, and vindictive, prosecution. In a welcome show of support, one of Greece’s leading dailies, Ta Nea, reprinted the list on Monday. The real scandal is the two years of government inaction — which may end as a result of this disclosure.

Eurozone leaders are firmly committed to a banking union, at least on paper. But do Member States agree on the current proposals? And what do these proposals leave out? This column argues that a dangerous combination of disagreements between Member States over contentious issues and pitfalls in the design of new institutions may well ensnare the Eurozone along its faltering path towards recovery.

The leaders of Eurozone countries issued an unprecedented commitment on 29 June; the statement began, “[w]e affirm that it is imperative to break the vicious circle between banks and sovereigns” (Euro Area Leaders 2012). This statement officially acknowledged leaders’ intention to break the ‘doom loop’ of the mutually-reinforcing deterioration of credit conditions afflicting weaker member states such as Spain and the banks headquartered in them. Severing this feedback loop will require a transfer of vast parts of banking supervision and policy apparatus from national- to European-level in the form of a new banking union. This transfer is probably a prerequisite for maintaining the integrity of Europe’s monetary union in any crisis-resolution strategy. Of equal importance is that leaders’ failure to deliver on their pledge would severely impair investors’ already-damaged confidence in the ability of Eurozone governments to act collectively.

The action plan outlined in the June statement defines a sequence of two explicit steps.

The ECB should first be endowed with broad supervisory powers and thus become the anchor of a ‘single supervisory mechanism’ for participating Member States.

Once the single supervisory mechanism is deemed effective, the European Stability Mechanism (ESM) - the Eurozone’s newly-established intervention fund - would be able to recapitalise banks directly. Corresponding instruments are yet to be clarified, but would probably include common equity.

Sunday, October 28, 2012

The speaker of the Greek Parliament, several employees of the Finance Ministry and a number of business leaders are on a list of more than 2,000 Greeks said to have accounts in a Swiss bank, according to a respected investigative magazine. The Greek magazine, Hot Doc, published the list on Saturday, raising the stakes in a heated battle over which current and former government officials had seen the original list passed on by France two years ago — and whether they had used it to check for possible tax evasion.

Hot Doc said its version of the list matches the one that Christine Lagarde, then the French finance minister and now the head of the International Monetary Fund, had given her Greek counterpart in 2010 to help Greece crack down on rampant tax evasion as it was trying to steady its economy. The 2,059 people on the list are said to have had accounts in a Geneva branch of HSBC.

Questions about the handling of the original list reached a near frenzy in Athens last week as two former finance ministers were pressed to explain why the government appeared to have taken no action on the list. The subject has touched a nerve among average Greeks at a time when the Parliament is expected to vote on a new 13.5 billion euro austerity package that could further reduce their standards of living.

The publication of the list is likely to exacerbate Greeks’ anger that their political leaders might have been reluctant to investigate the business elite, with whom they often have close ties, even as middle- and lower-class Greeks have struggled with higher taxes and increasingly ardent tax collectors.

Friday, October 26, 2012

Of all the operas written during Germany's Weimar Republic (1919-33), probably the most haunting is the last.

Kurt Weill's The Silver Lake, written with playwright Georg Kaiser, tells the story of two losers - a good-hearted provincial cop and the thief he has shot and wounded - as they make their way through a society ruined by unemployment, corruption and vice.

After spending a week again in Greece - amid riots, hunger and far right violence - I finally understood it.

The opera was meant to be Weill's path back into the mainstream. It was his first break from collaborating with Bertolt Brecht, and was scheduled to open simultaneously in three German cities on 18 February 1933.

A senior Greek police officer has claimed that the far-right Golden Dawn party has infiltrated the police at various levels. He has laid the blame on consecutive governments and the leadership of the police force for turning a blind eye to what he describes as "pockets of fascism".

Speaking to the Guardian on condition of anonymity, the officer said the Greek state had been fully aware of the activities of Golden Dawn for several years, with the National Intelligence Service and other security agencies monitoring it closely. The officer claimed police chiefs had had the opportunity to isolate and remove these small "pockets of fascism" in the force but decided not to. The state, he said, wanted to keep the fascist elements "in reserve" and use them for its own purposes.

The officer said he believed that Golden Dawn members could be used against the Greek left, which has led popular street protests against the government and austerity measures imposed by the EU. He expressed his belief that neo-fascist groups may already have acted as agents provocateurs during demonstrations across the country, to provoke clashes between demonstrators and the police or even between demonstrators themselves.

Greece will need an extra €30 billion ($39 billion) in aid from its international creditors through 2016 to make up for a deeper-than-expected recession and a two-year delay in budget targets, senior European finance-ministry officials were told Thursday in their first detailed discussion on how to keep the debt-ridden country in the euro zone.

Finding a solution to Greece's debt dilemma is set to occupy euro-zone policy makers for much of the autumn, forcing them to make politically unpopular decisions just as they try to stabilize larger countries like Spain.

The extra funds would mean Greece's debt load would still be around 140% of annual economic output by 2020, said two European officials. That is far above the 120% that was deemed sustainable when the country's second bailout package was agreed upon in February. Because of that, the International Monetary Fund continues to push euro-zone governments and the European Central Bank to write off some of the money they have lent to Greece—an option that remains unacceptable to most governments, the officials said.

Within 24 hours Mr Panagiotaros had retracted his claim that Greece was "in civil war", saying instead "there is no civil war" and accusing Newsnight of "paraphrasing" his words. We had simply broadcast them, un-edited and in English.
“Start Quote

Fifteen protesters have told us they intend to bring a case against the Athens police”

Now three new reports cast light on the substance of our story - which was: alleged police torture of anti-fascist detainees, Golden Dawn's influence inside the Greek police force, and its potential influence on the operational behaviour and priorities of the police in the Attica region around Athens.

Today, lawyers for 15 protesters who claim they were mistreated and abused in police detention, have shown Newsnight coroners' reports on eight of the detainees.

The most serious of the coroners' documents confirms "grievous bodily harm caused by a sharp and blunt object," requiring the victim to be off work for a month.

Another describes a kind of injury that is consistent with being caused by a taser, as claimed in the original Guardian report.

Fifteen protesters have told us they intend to bring a case against the Athens police.

A second report issued yesterday by the UN High Commissioner for Refugees contains figures for racial attacks in Greece, which are not routinely collected by the Greek government.

Tuesday, October 23, 2012

One of the hottest trades of the past few months has been the bonds of a country so shaken by economic and social turmoil that a neo-Nazi party is running third in the polls.

That's right: Hedge funds have been buying Greece.

Ever since Greece completed a debt restructuring in March that turned €200 billion in bonds into about €60 billion, distressed-debt investors—many at U.S. hedge funds—have been picking them over. Hedge-fund analysts have flooded Greek finance officials with requests for information. Prices have climbed.

Third Point LLC, based in New York, crowed about Greece in its investor letter earlier this month, citing the resilience of the bonds of fellow bailout-recipient Portugal. "We expected Greece to keep its head up and undergo a similar metamorphosis," the letter said.

Other buyers include Greylock Capital Management, a New York hedge fund specializing in distressed debt that has been bullish on Greece for months, and Fir Tree Partners, a New York-based multistrategy fund with $8 billion under management.

One of the hottest trades of the past few months has been the bonds of a country so shaken by economic and social turmoil that a neo-Nazi party is running third in the polls. Charles Forelle has details on Markets Hub.

Greece is spiraling into the kind of decline the U.S. and Germany endured during the Great Depression, showing the scale of the challenge involved in attempting to regain competitiveness through austerity.

The economy shrank 18.4 percent in the past four years and the International Monetary Fund forecasts it will contract another 4 percent in 2013 as Greece struggles to reduce debt in exchange for its $300 billion rescue programs. That’s the biggest cumulative loss of output of a developed-country economy in at least three decades, coming within spitting distance of the 27 percent drop in the U.S. economy between 1929 and 1933, according to the Bureau of Economic Analysis in Washington.

“Austerity has been destroying tax revenue and therefore thwarting the intended effect,” said Charles Dumas, chairman of Lombard Street Research, a London-based consulting firm. “There’s no avoiding austerity, though, because these people have no borrowing power. The deficits are there.”

Greece’s restructured bonds have benefited amid speculation that creditors are poised to release more bailout funds. Greek bonds maturing in 2023, which yielded more than 30 percent at the end of May, now yield about 16.4 percent. The next block of aid is slated to total 31 billion euros ($40.5 billion), mostly to recapitalize the nation’s banks.

Evaluation of the financial costs of a Eurozone breakup depends critically on the interpretation of the balances central banks hold in the EZ payment system. This column, which replies to the interpretation by De Grauwe and Ji, argues that TARGET balances represent real wealth that would be lost in a breakup.

When exchange rate adjustments are impossible, imbalances of cross-border payment flows must be accommodated officially. This baseline fact about monetary union has sparked extensive discussion on what the resulting asset positions mean (Sinn 2011a,b, Tornell and Westermann 2012, Whelan 2012).

On one side, Sinn and Wollmershäuser (2012) argue that Finland, the Netherlands, Luxembourg, and Germany face the risk of losing the TARGET claims of their national central banks should the euro break up. On the other, De Grauwe and Ji (2012) deny that such a risk exists1. They base this on the grounds that:

The risk stems only from these countries' self-chosen net foreign asset position;

Fiat money has a value independent of the corresponding national central bank's assets; and

Foreign speculators could be excluded from a currency conversion if necessary;

Given that the Eurozone's gross TARGET claims or liabilities today amount to about €1 trillion and constitute the largest single item in the balance sheets of most central banks of Eurozone members, this would be good news for the four countries mentioned. If De Grauwe and Ji are right, however, one wonders why Moody's recently announced that it is considering a downgrade of the credit ratings of Germany, the Netherlands, and Luxembourg in view of the riskiness, among other factors, of their huge TARGET claims2. Can it be that the analysts of Moody's have overlooked something?

I will show that they didn't and that, in fact, all three points of De Grauwe and Ji are erroneous or do not apply to the assessment of TARGET losses in the case of Eurozone breakup. To this end, let me consider the issue in more detail. I will start by reviewing the nature of the TARGET imbalances according to Sinn and Wollmershäuser (2012) and then proceed, in turn, to each of the De Grauwe and Ji (2012) counterarguments. Some of my comments also apply to a new paper by Buiter and Rahbari (2012b) that came out after this note was written. I briefly refer to what I perceive as their error in the section on fiat money.

Thursday, October 18, 2012

The European Union is now the proud owner of a Nobel Peace Prize. When the choice alighted on Barack Obama three years ago, the Norwegian Nobel Committee was criticized for honoring someone whose achievements were still to come. The Committee took that criticism to heart, and this time decorated an institution with a proud past, but a clouded future.

The eurozone is distinct from the EU of course, but it is the Union’s most ambitious undertaking to date, and it is still struggling to equip itself with the structures needed to bolster a currency union. A common fiscal policy remains a distant dream, as does a genuine political union.

But Europe’s policymakers claim to be making progress toward a so-called “banking union,” which means collective banking supervision, rather than a merger of banks themselves. In September, the European Commission announced a plan to make the European Central Bank the supervisor of all 6,000 of Europe’s banks.

When the International Monetary Fund (IMF) and European finance ministers meet today at the European Union (EU) summit, they are bound to butt heads over the decision to release Greece’s next €31.5bn bailout installment.

The prospect of default may be a possibility once again. European leaders and international lenders will likely come to an eleventh-hour agreement, but it may not be a bad idea to keep Greek politicians wondering in the interim.

Greece has become complacent about making necessary structural changes, having received two bailouts, interest rate support from the European Central Bank (ECB), and an internationally sanctioned private debt restructuring earlier this year. It has failed to reform its public sector, privatise state-owned companies, increase competitiveness — all conditions for receiving additional international support. The resurgent spectre of default would send a strong message to Greek politicians that their cowardly approach to reform is both unacceptable to creditors and unsustainable for Greece’s balance sheet in the long-run.

Greece’s public sector is as bloated now as it was upon agreement to its first bailout in May 2010. Public expenditure as a percentage of GDP remains at a whopping 51 per cent, according to IMF figures. Some European countries do have a higher proportion, but without Greece’s abysmal level of government inefficiency.

Wednesday, October 17, 2012

A plan to create a single eurozone banking supervisor is illegal, according to a secret legal opinion for EU finance ministers that deals a further blow to a reform deemed vital to solving the bloc’s debt crisis.

A paper from the EU Council’s top legal adviser, obtained by the Financial Times, argues the plan goes “beyond the powers” permitted under law to change governance rules at the European Central Bank.

The legal service concludes that without altering EU treaties it would be impossible to give a bank supervision board within the ECB any formal decision-making powers as suggested in the blueprint drawn up by the European Commission.

Those non-eurozone countries that want to opt into the bank supervision regime would also be legally unable to vote on any ECB decisions – a key demand of countries such as Sweden and Poland.

While it is common for lawyers from different EU institutions to disagree on aspects of proposals, diplomats involved in the talks said the sharp difference in legal opinion would complicate efforts to overcome the deep-set concerns of some member states. Banking union will be a central topic at the EU leaders summit on Thursday.

“Staff teams of the European Commission (EC), the European Central Bank (ECB), and the International Monetary Fund (IMF) have concluded their visit to Greece to discuss with the authorities the set of policies that could serve as a basis for the completion of the first review of the country’s economic adjustment program.

“During the visit, the EC/ECB/IMF staff teams and the authorities had comprehensive and productive discussions on the policies needed to restore growth, employment and competitiveness, secure fiscal sustainability in a socially balanced manner, and strengthen the financial system.

“The authorities and staff teams agreed on most of the core measures needed to restore the momentum of reform and pave the way for the completion of the review. Discussions on remaining issues will continue from respective headquarters and through technical representatives in the field with a view to reaching full staff level agreement over the coming days. Furthermore, financing issues will be discussed between the official lenders and Greece.”

Greece's far-right party, Golden Dawn, won 18 parliamentary seats in the June election with a campaign openly hostile to illegal immigrants and there are now allegations that some Greek police are supporting the party.

"There is already civil war," says Ilias Panagiotaros. If so, the shop he owns is set to do a roaring trade.

On the walls are posters celebrating the last civil war in Greece, which ended in 1949.

"Greek society is ready - even though no-one likes this - to have a fight: a new type of civil war," he says.

"On the one side there will be nationalists like us, and Greeks who want our country to be as it used to be, and on the other side illegal immigrants, anarchists and all those who have destroyed Athens several times," he adds.

You hear comments like this a lot in Greece now but Ilias Panagiotaros is not some figure on the fringes: he is a member of the Greek parliament, one of 18 MPs elected for the far-right Golden Dawn in June's general election.

The World Economic Outlook published by the International Monetary Fund last week has created new excitement around the debate on the effectiveness of fiscal retrenchment. The evidence that governments have consistently been underestimating the size of the fiscal multiplier – which measures the impact of deficit reduction measures on economic growth – has been used to suggest that austerity policies are doomed to fail.

That is the wrong conclusion to draw from the IMF study.

The fiscal multiplier quantifies the impact of a given change in taxes or public expenditures on gross domestic product (GDP). Those who interpreted the IMF study as evidence that austerity is self-defeating mistakenly believe the multiplier measures the impact of a change in the budget deficit on the long-term rate of growth of the economy. In fact the multiplier measures the one-off impact of budget changes on output when the adjustment is made.

Let us consider a simple example of a country with a budget deficit of 1 per cent of GDP, a debt to GDP ratio of 100 per cent and a trend growth rate of 1 per cent per year. A multiplier lower than one implies that when the deficit is reduced from 1 per cent to zero, GDP continues to rise – although temporarily at a lower rate than the trend – and the debt falls as a percentage of GDP.

The battle to save the euro turns on one question: Can large governments, notably Italy and Spain, get their debts under control?

Because they are in a monetary union, they can’t take the easy way out by devaluing their currencies to make their obligations smaller and exports cheaper relative to those of other countries. Instead, they have to make painful budget cuts and slash workers’ wages to restore their competitiveness -- moves that, in the short term, can make their debts less manageable by eroding economic growth. If the belt-tightening proves too much to bear, or if markets lose faith in their ability to succeed, the euro area will break apart.

As Europe’s leaders meet for their two-day summit in Brussels this week, they can take credit for considerable progress in containing market panic and demonstrating their commitment to the currency. They have pledged to share responsibility for overseeing and shoring up euro-area banks, potentially relieving struggling governments of a big liability. More important, the European Central Bank has promised unlimited support to keep countries’ borrowing costs in check, as long as they act in a fiscally responsible manner.

So how much has all the activity achieved? To get a better picture, we built a model to assess the solvency of euro-area governments.

Tuesday, October 16, 2012

In its relations with its most powerful clients, the International Monetary Fund possesses “the right to be consulted, the right to encourage and the right to warn”. Walter Bagehot, the great Victorian economic journalist, gave this description of the role of the British monarch in the 19th century. I applied this phrase to the role of the fund in a paper I submitted to its 2011 triennial surveillance review. At the annual meetings in Tokyo, the fund fulfilled precisely this role. What matters, however, is that its members, above all, the US and Germany, act upon the warnings and encouragement they have received.

The warning provided by the IMF’s World Economic Outlook was that: “The recovery continues, but it has weakened. In advanced countries, growth is now too low to make a substantial dent in unemployment. And in major emerging market economies, growth that had been strong earlier has also decreased.” The IMF revised its forecast for 2013 growth in advanced economies from the 2.0 per cent it forecast in April to 1.5 per cent. For developing countries, it cut its forecast from April’s prediction of 6.0 per cent to 5.6 per cent. The performance of the US, with forecast growth of 2.1 per cent next year (just 0.1 percentage points lower than forecast in July), is expected to be far better than that of the eurozone, where growth is forecast at 0.2 per cent next year (0.5 percentage points lower than forecast in July), after -0.4 per cent in 2012. Even Germany’s economy is forecast to grow by a mere 0.9 per cent in 2012 and 2013. Spain’s is forecast to shrink by 1.5 per cent and then 1.3 per cent. The eurozone is a cage for masochists.

It is no secret why growth is slowing in high-income countries: this is due to fiscal tightening, weak financial systems and powerful uncertainty. This toxic combination is particularly threatening inside the eurozone, where, again no surprise, countries reliant on exports are affected by the shrinking economies of big trading partners. As the latest Global Financial Stability Report shows, cumulative capital flight from peripheral eurozone economies is more than 10 per cent of gross domestic product. Indeed, without support, principally from the European Central Bank, peripheral economies would have had to impose exchange controls. They might even have left the eurozone. The fear of break-up remains pervasive: it is always hard to make masochism a credible strategy. (See charts.)

So far, so bad. But even these depressing forecasts make two possibly optimistic assumptions. The first is that the US avoids the “fiscal cliff” created by its quarrelling legislators. If not avoided, this would impose a tightening of 4 per cent of GDP. Sane people know the result: a deep recession and, possibly, outright deflation. Can US legislators be that stupid? One must assume not. The second optimistic assumption is that “European policy makers take additional action to advance adjustment at national levels and integration at the euro area level. As a result, policy credibility and confidence improve gradually.” Will European policy makers be that effective? One wonders, even if they have been more decisive recently.

While Athens waits for more aid from the European Union, the country continues to be administered in the same old careless manner. Corrupt politicians and the rich continue to help themselves to Greece's funds, and little is being done about it.

How can someone who has declared an annual income of €25,000 ($32,400) transfer €52 million abroad? What kind of supplementary income must an individual have who, according to his tax returns, earned €5,588 in 2010, yet still managed to move €19.8 million abroad? And how can it be that a Greek citizen sequesters €9.7 million abroad although he supposedly earned exactly zero euros?

These are the questions that tax fraud investigators will have to ask of a number of individuals whose identity has so far only been made public in the form of initials. For instance, a "G. D." stands at the top of a list with the names of 54,000 Greek citizens who relocated major assets abroad between 2009 and 2011. The list stems from the Greek central bank and is now in the hands of the Finance Ministry.

It is the longest of four lists that are currently circulating in Athens. Each contains the names of people whose financial circumstances -- bank balances and real estate holdings -- do not correspond at all with what they claimed on their tax returns. But hardly anything is being done about it. The Greek reality is sometimes paradoxical: While the governing coalition was busy squabbling with international creditors over how many hundreds of euros can still be trimmed from teachers' and nurses' paychecks, and Athens continued slashing employee pensions, wealthy Greeks moved billions abroad with relative impunity.

The odyssey of the "Lagarde list," as it's known, exemplifies the typically lax attitude toward tax criminals. For many months, it was thought to be lost, but then it resurfaced in early October. Now, the public prosecutor for financial crimes has a copy. It lists 1,991 Greek owners of Swiss bank accounts, and reportedly includes many prominent individuals from the realms of politics, business and culture.

Covering the euro-zone crisis is often surreal. But seldom as much as when you hear a senior official liken banking supervision to love. But let’s take things from the start.

Much of the debate behind closed doors in Brussels and Frankfurt these days is about the single banking supervisor — an agency of/under the European Central Bank that will police the currency bloc’s banks. The details of this first step towards a banking union are being negotiated right now, but one thing that makes it interesting is that its creation and effective operation is a prerequisite for the euro-zone bailout fund to rescue banks directly.

The key word here is “effective.” It’s not enough for this new institution to be designed, legislated, set up. It needs, euro-zone leaders agreed back in June, to be effective. That’s so the bailout fund–the European Stability Mechanism–can trust that the banks it’s saving don’t blow up in its face or on its balance sheet.

Monday, October 15, 2012

European leaders will devote another summit to discussing the future of the euro area later this week, with a view to exploring options such as a euro-zone budget and contracts committing countries to economic reforms, a senior European Union official said Monday.

The 27 EU heads of state are due to meet in Brussels on Thursday for a planned two-day summit. A draft of their conclusions obtained by Dow Jones Newswires shows that they are set to stress their devotion to restoring growth and jobs in the economically challenged bloc.

But the centerpiece of the summit is set to be a report by European Council President Herman Van Rompuy on the future architecture of Economic and Monetary Union, the EU official said, otherwise describing it as a "run-of-the-mill" meeting.

Mr. Van Rompuy's bolder proposals will be up for debate, the official said, adding that the European leader will seek "an exploratory mandate" to get into the nitty-gritty of the common budget and the contracts options and present more details on them at the next leaders' summit in December.

This summer Roger Bootle won Lord Wolfson's £250,000 prize for the best advice for a country leaving the European Monetary Union (one may assume that this advice is aimed at Greece). A more statist, anti-liberal policy than his could hardly be envisioned, which is a sad commentary on the mindset of the judges chosen by Lord Wolfson. His advice contrasted sharply with that of Dr. Philipp Bagus, whose liberal, transparent, and free-market-oriented policy advice was rejected in favor of Mr. Bootle's call for state secrecy and coercion.

Mr. Bootle's statist advice stems from his misunderstanding of basic economics in which he views symptoms as causes. He offers no explanation for Greece's unsustainable debt burden, high cost structure, and high unemployment other than the standard Keynesian explanation of inadequate aggregate demand. Once this fallacious view is swallowed, the prescription follows axiomatically, i.e., devalue the currency to restore competitiveness vis-à-vis foreign markets, which will increase aggregate demand and reduce unemployment. Oh, and the Greeks may have to default on their foreign debt, but history shows that this is not a problem. Really?

Despite his lengthy and repetitive prize submission, Mr. Bootle's recommendations can be summarized in this one sentence: In complete secrecy and with no prior discussion, redenominate all Greek euro-denominated bank accounts into drachma-denominated accounts and devalue the drachma.

That's it! There is no need to cut public spending. Quite the contrary, because public spending adds to the Keynesian concept of aggregate demand, and aggregate demand cannot be allowed to fall. The secrecy part is essential for Mr. Bootle's plan. If the Greek people got wind of what was to happen, they would take measures to protect their property, such as transferring their euro-denominated bank balances to banks in Germany. Mr. Bootle refers to such a development as a crisis, but a crisis for whom? Taking measures to protect one's property would not be a crisis for the common Greek citizen. It would be exercising rational self-interest. Mr. Bootle's so-called plan is nothing more than robbing Greek citizens in the middle of the night!

During the summer there were a number of developments justifying optimism about the euro’s survival chances. Since late September, however, the euro area’s political leaders have done all they can to dash these hopes.

Among the positives were the decision to enhance the European Stability Mechanism, the rescue fund for troubled nations, allowing the recapitalisation of banks directly without going through the sovereign; the German constitutional court’s approval of the ESM; the emergence of a pro-European majority from the Dutch elections; and the European Central Bank unveiling its big but conditional bazooka, outright monetary operations (OMT).

And then it all went pear-shaped. Germany insists that any direct bank recapitalisation by the ESM be covered by a sovereign guarantee. The distinction between the ESM lending to the sovereign with the sovereign recapitalising its banks – creating an on-balance sheet sovereign liability – and the ESM recapitalising the banks directly but with a guarantee from the sovereign – creating an off-balance sheet contingent sovereign liability – is one of appearance only. Markets will see right through it.

Germany and its allies want the supervisory role of the ECB restricted to a small number of large, mainly cross-border banks. Systemic problems can be created by clusters of domestic banks, as demonstrated by the Landesbanken and cajas. In addition, Germany and the other supporters of a minimalist supervisory role for the ECB want to delay the start of that role and thus also the start of direct bank recapitalisation by the ESM. Finally, the German, Dutch and Finnish finance ministers argue that there should be no mutualisation by the ESM of sovereign debt incurred in past bank recapitalisations, including Spain’s. In the case of Ireland, which incurred about €63bn of sovereign debt recapitalising its banks, this significantly increases risks of an Irish sovereign default.

Europe’s economy is likely to shrink this year and to see little or no growth in 2013. Please note: That’s if all goes well. The International Monetary Fund’s dismal new forecasts assume -- or let’s say hope -- that Europe’s plan for restoring stability will soon take effect. Don’t take this for granted.

Output in the euro area will shrink 0.4 percent this year and rise by just 0.2 percent in 2013, according to the new projections. The outlook has worsened since the IMF released its previous forecasts just three months ago. And the risk is that it will worsen further.

With lower growth, the region’s troubled economies face calls for yet more tightening. Spain in particular has announced new spending cuts and tax increases, anticipating the conditions that the European bailout fund will attach to a rescue package. These conditions must be in place before the European Central Bank can start its promised purchases of Spanish government debt.

If the cuts happen, they will further hamper economic growth. Outright political collapse is a risk in Greece. It’s none too remote in Spain, either, where separatist pressures are on the rise.

Enough is enough. Spain has already cut its “structural” or cyclically adjusted budget deficit from almost 10 percent of gross domestic product in 2009 to an expected 3 percent in 2013. Three years ago, Greece had a structural deficit of 18.6 percent of GDP; the IMF says this will fall to 4.5 percent in 2012 and 1.1 percent in 2013. Italy’s structural deficit was an already modest 3 percent in 2009; next year, there’ll be a surplus. All this against the background of shrinking output.

When shopaholics find all their credit cards are maxed out and they've lost their job they only have two options. They can stare into the middle distance while all their possessions are taken away one by one, or they can contact their creditors.

It is always better to find a go-between such as Citizens Advice, which can arbitrate and will usually persuade angry lenders that a customer who loses their job cannot pay all the money back.

The International Monetary Fund rejected the intermediary role in the aftermath of the financial crisis. When, in 2010, euroland's most indebted shopaholic, Greece, found itself without enough income to cover debt payments, the IMF sided with her creditors. It told Athens to repay the lot in a scheme arranged by Germany, France and the other northern European creditor countries that backed the deal.

However, once the IMF joined as a creditor in this new repayment programme, it realised officials had made a serious miscalculation. Greece had no money to pay back its debts. The Washington-based super-bank arranged a 50% write-down and told Germany to live with losses. Greece struggled on.

Saturday, October 13, 2012

On the day the European Union was awarded the Nobel Peace prize, the world's top financial officials meeting in Japan complained about how Europe's debt crisis is roiling the rest of the globe, while an EU report detailed what the bloc sees as undone to help members act in harmony.

Concern over euro-zone debt foibles was voiced at the International Monetary Fund's annual meetings in Tokyo this week, reflecting fatigue among the world's finance ministers and central bankers as the problem continues to dominate the financial agenda almost three years after the crisis began, and threatens to slam the brakes on global growth.

Large, developing countries urged the euro zone to take tough decisions on bailouts for Greece and Spain that critics say are months overdue.

Officials from both inside and outside the euro zone said the bloc needs to reconsider its strategy of budget cuts that have thrown some countries into deep recession while failing to quell investor skepticism about their public finances.

And worries about the IMF's large exposure to the euro zone have made the fund's board members wary of lending another dollar to prop up the 17-nation currency area.

"The delayed reactions to the crisis, especially in the euro area, have led to the accumulation of intractable problems," said Brazil's finance minister, Guido Mantega, in remarks that will be delivered to the IMF's policy committee Saturday.

Friday, October 12, 2012

The banner headline across the front page of Germany’s Bild newspaper summed up the reaction of many of its readers to the demonstrations in Athens that greeted Angela Merkel, German chancellor.

“Germany does not deserve THAT” it said, with a big red arrow pointing at a Nazi swastika being waved by the “repulsive” protesters.

Bild is a paper that frequently plays on the prejudices of its readers, but it also has a good feel for the popular pulse. More than two years ago, when the Greek financial crisis broke, the newspaper sent a journalist round the streets of Athens trying to persuade passersby to exchange their euros for Greek drachmas – the former national currency.

This triggered a xenophobic war of words and pictures between the national media in the two countries, just as Ms Merkel and her fellow European leaders were wrestling with the problem of how to rescue the Greek economy. Ever since, popular opinion in Germany and Greece has been deeply polarised, with a majority of Germans in favour of seeing Greece leave the euro and a majority of Greeks blaming Germany for the drastic austerity measures that have been forced upon their successive governments.

The eurozone and the International Monetary Fund are locked in their worst showdown of Europe's three-year sovereign debt crisis, engaged in a dangerous game of brinkmanship over how to respond to a Greek bailout that is threatening to go off the rails.

The IMF, it is understood in Brussels, is insisting that Greece's eurozone creditors and the European Central Bank write down or write off up to €30bn (£24bn) in Greek debt to close a funding gap in the Greek rescue plan which may need to be extended by two years.

The showdown between the eurozone and the IMF is being described as eyeball-to-eyeball, a shouting match, and a contest to see who will blink first. It is expected to come to a head next month. The IMF is demanding that the eurozone and the ECB resort to a new policy of Official Sector Involvement (OSI), meaning a writedown or writeoff of Greek debt to its official creditors - a move that the ECB and the German government are resisting fiercely.

Greece needs a cash payout from its previously agreed bailout of more than €30bn next month, without which it will go bankrupt and be unable to pay public workers or pensioners.

Thursday, October 11, 2012

At a time of fierce debate on how best to reignite the recovery – in individual countries and internationally – the International Monetary Fund has emerged as a respected arbiter of economic policies. When Christine Lagarde, the IMF’s chief, warned against possible excesses of austerity this week, it was bound to cause waves.

Ms Lagarde’s words, and those of the fund’s technical staff, should be pondered not pounced on. Not just because there can be no doctrine of IMF infallibility: like most other forecasters it has been proven over-optimistic on the strength of the recovery. But also because the fund’s message is consistent with, not contrary to what it has been saying for some time.

Ms Lagarde repeated the advice she has given before, and with which this newspaper agrees. Countries should stick to their deficit-cutting policies, but not to nominal targets. Deficit-reduction outcomes may slip in the face of a worse slowdown than expected, but policies should not – nor should new cuts be put in place to “catch up”. Governments with fiscal breathing room should avoid cutting, while those without it must cut at the right pace. In particular, Greece should be given the two more years it is asking for. In the UK, further monetary stimulus and better targeting of taxes and public spending must come before any fiscal relaxation unless growth prospects deteriorate further.

For an institution once nicknamed “It’s Mostly Fiscal” for espousing austerity during financial crises, the International Monetary Fund’s assessment in its World Economic Outlook (WEO) of threats from fiscal consolidation mark an important stage in a remarkable intellectual shift.

Some of the IMF’s critics – its demands for fiscal tightening during the Asian financial crisis of 1997-1998 created intense controversy and are still remembered in the region – are no doubt pleased to see the fund’s management sitting down to a fricassee of sacred cow.

Yet as far as its involvement in rescue programmes for Greece – and potentially Spain and Italy – is concerned, the fund will find it easier to change its mind than its policies. Its junior role in the rescue “troika”, alongside the European Commission and the European Central Bank, means it will have to convince its more sceptical fellow lenders that slower fiscal consolidation would be helpful.

“The WEO section on fiscal multipliers is a very important finding, which shows the IMF is a credible empirically driven institution which is not shy of giving up its own dogma on these issues,” says Jacob Funk Kierkegaard at the Peterson Institute think-tank in Washington. “But it is likely to make only a marginal difference in forward-looking changes to [rescue lending] programmes”.

The Greek debate over Europe is directly related to its traumatic experience at the epicentre of the crisis. Since 2010 the country has had to deal with sky high interest rates, severe recession, harsh austerity, structural reform and the indignity of emergency injections of cash to keep it solvent. Many Greeks, who had seen membership of the European Union as a factor of socioeconomic progress, now blame elements of Europe for much of what they face. New political movements such as Syriza have capitalised on this discontent. However, the most negative – even catastrophic – scenarios involving Greece remain unlikely, provided conditions allow the fundamentally pro-European sentiments of the majority of Greeks to reassert themselves. If not, Greece could become the weakest point for the European project, with the potential to inflict incalculable economic and socio-political costs on the rest of the EU.

The figures show the extent of the trauma that Greece is undergoing. Its GDP shrunk by around 7% in 2011 with a similar decline expected in 2012; in this fifth year of recession it has lost cumulatively over 20% of its 2008 GDP; unemployment sits at 24% (55% for young people) with 630,000 long-term unemployed; vital social services have been caught up in the massive spending cuts; poverty,homelessness, crime, and suicide rates are galloping. The harsh austerity programme is making itself felt in pensions and take home pay in both the public and private sectors.

Unsurprisingly, public sentiment has been badly affected. Public trust in government, the parties and institutions has sharply declined. The two parties (New Democracy and PASOK) that dominated Greek political life alternating in power since 1974, fell from a total vote of 77% in 2009, to just 32% and 42% in the twin elections of 2012 (May and June). On top of being implicated in serious corruption and mismanagement scandals of the past, both parties are heavily blamed for the crisis. But the finger of blame is also pointed towards Europe.

Other Blogs by Aristides Hatzis

Subscribe to "The Greek Crisis"

Search This Blog

Loading...

by Petar Pismestrovic

About

This blog is dedicated to the understanding of the current Greek (but also European) economic, political and institutional crisis. It was created by Prof. Aristides Hatzis of the University of Athens, after many requests by his students who seek a source of reliable analysis on the Greek current affairs. Its aim is to post commentary and reports published mainly in the major U.S. and European media and to encourage a rigorous discussion.